Edited version of your written advice

Authorisation Number: 5010057909598

Date of advice: 29 April 2019

Ruling

Subject: Deductions – Medical Expenses

Question

Are you entitled to claim a deduction for surgery?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are employed full time.

You are also a sole trader.

You are not entitled to WorkCover Insurance.

You fell while working in your sole trader business.

You do not have Injury insurance or Income Protection insurance.

You were injured and required surgery, for which you had to pay.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income..

However, outgoings that are of a capital, private or domestic nature, or relate to the earning of exempt income are specifically excluded from being deductible. In particular, paragraph 8-1(2)(b) of the ITAA 1997 specifically denies a deduction for expenditure that is of a private or domestic nature. Expenditure that is private in nature generally relates to a taxpayer in their personal or private capacity.

To ascertain if an expense is necessarily incurred in carrying on a business for the purpose of gaining or producing income it is a question of fact and degree.

Expenditure that has been incurred in the course of income-producing or business operations may still not have a sufficient nexus to the income to be deductible.

Taxation Ruling TR 95/33 looks at the deductibility of losses and outgoings. It says that "necessarily” does not mean that the outgoing must be unavoidable or logically necessary but, rather, that the outgoing must be clearly appropriate or adapted for the ends of the business.

If in doubt the courts look to five general principals of deductibility to determine if the expense has sufficient nexus with the gaining or producing assessable income.

● Purpose – Here the courts look to see if the taxpayer had some other purpose in incurring the expenditure. If there is another purpose the expense other than in the business in gaining assessable income the expense may not be deductible.

● “Incidental and relevant” - Under this test, “for expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end " ( Ronpibon Tin NL & Tongkah Compound NL v FC of T (1949) 78 CLR 47 at p 56). In other words it is both, through size and application, sufficient and necessary that the expense should be found in, or expected in, the outcome of the assessable income.

● The "essential character” test – Here we ask if the activities of the operation lean to the expense being the essential character of a working expense, that is, whether the expense has the essential character of a "business'' or an "income-producing'' expense.

● The "perceived connection" test - This does not require that the purpose of the expenditure be the gaining of the income of that year, so long as it was made in the given year and is incidental and relevant to the operations or activities regularly carried on for the production of income.

● The relevance of "express or implied terms of employment contracts ".

Generally medical expenses have no direct connection to the gaining or producing of assessable income. Medical expenses are usually a prerequisite to the earning of assessable income. There is usually insufficient connection to the gaining or production of assessable income for a deduction to be allowed. This is the case even though a taxpayer may, as a matter of practicality, need to incur the expenditure to earn assessable income.

Taxation Ruling IT 2217 addresses income tax deductions for medical appliances. In a United Kingdom case of Norman v. Golder, reported in Vol. 1 1945 All E.R. at page 352, the Court of Appeal had to consider whether a professional shorthand writer was entitled to income tax deductions for medical expenses incurred due to illness caused by working in unfavourable conditions. The Court made these observations at page 354:

"It is quite impossible to argue that a doctor's bills represent money wholly and exclusively laid out for the purposes of the trade, profession, employment or vocation of the patient. True it is that if you do not get yourself well and so incur expenses to doctors you cannot carry on your trade or profession, and if you do not carry on your trade or profession you will not earn an income, and if you do not earn an income the Revenue will not get any tax. The same thing applies to the food you eat and the clothes you wear. But expenses of that kind are not wholly and exclusively laid out for the purposes of the trade, profession or vocation. They are laid out in part for the advantage and benefit of the taxpayer as a living human being. Para (b) of the rule equally would exclude doctor's bills, because they are in my opinion, expenses of maintenance of the party, his family or a sum expended for a domestic or private purpose, distinct from the purpose of the trade or profession."

Your circumstances are similar to those above - you incurred expenses for surgery for an injury that happened while you were at work.

Although Australian income tax law differs from that in the UK, the reasoning adopted in the above case is followed in Australia. While your good state of health is an essential prerequisite to earning income, the surgery costs were not essential in character, or relevant, in the normal operations or activities of XYZ, nor in the actual gaining of assessable income. (The same principle of taxation law applies to other ‘preparatory’ expenses such as those incurred for child-minding and for travel to and from work).

We understand and acknowledge that your injury occurred at work, you were unable to purchase insurance and that the surgery will improve your capacity to carry out income earning activities. However, the surgery expense itself is not sufficiently connected to your income earning activities with XYZ, but rather was incurred in overcoming an injury.

Even though you required surgery in order to work in your business, medical costs are classed as a private and domestic expense, and are not an allowable deduction.

Accordingly, for the reasons provided above, the cost of your surgeries is not a deductible expense under section 8-1 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).